In the last few days, hundreds of bankruptcy complaints against trade creditors were filed by bankrupt Chapter 11 debtor VRG Liquidating, LLC (formerly EMS) (docket 16-10971). The crux of the complaints that many businesses will be shortly served concern “preferences,” requesting the return of money received from bankrupt debtors 90 days prior to the bankruptcy filing of April 18, 2016 for goods or services sold. However, before you go writing a check to return hard earned money, you should know that you may have defenses that can be asserted.
What is Preference?
A preference is a payment received from a debtor, made within 90 days of the bankruptcy filing. Bankruptcy Code section 547(b) allows a bankruptcy trustee or debtor-in-possession (here, VRG) to avoid these payments, if the transfers were to or for the benefit of a creditor on account of an antecedent debt, while the debtor was insolvent. When Congress enacted the Bankruptcy Code, the policy behind preferences was to level the playing field for all creditors by not allowing a creditor to receive more than it would have within the debtor’s bankruptcy case.
Tight Deadline from Service
Once the complaint is served, there is a tight deadline of 30 days to respond. If you’re a trade creditor that did work with VRG Liquidating, LLC (formerly EMS), it’s advisable that you alert your billing, reception and other departments of this important pleading. You don’t want it sitting on someone’s desk who may be out on vacation and miss the opportunity to defend yourself.
Defenses to the Complaint
Although the Bankruptcy Code gives the power to recover these transfers, your business may have certain defenses. These defenses include: 1) payments made within the ordinary course of business; 2) new value for payments; payments made outside of the 90 day preference period (here the filing date was April 18, 2016); 3) settlements during the bankruptcy case; and/or payments made via C.O.D.
Information to Gather Immediately
To determine if you have any defenses and the proper response, it is critical to analyze your situation bankruptcy counsel. A review of the full payment history at least a year before the bankruptcy filing is key. This information includes:
- A copy of all invoices, showing invoice date, terms, and amount of each invoice;
- A copy of the payments received (i.e. checks, wires, cash deposit slip) and date posted to your bank account;
- Number of days elapsed between date of invoice and date payment was received; and
- Personnel involved with the debtor’s account so they can advise how payments were made, applied and any unique issues with the debtor.
It is critical to properly analyze this information and formulate a corresponding defense.
For more information on defending a preference action, or other bankruptcy issues, please feel free to contact Stark & Stark’s Bankruptcy & Creditors’ Rights Group: Marshall Kizner at (609)219-7449 or via email at mkizner@stark-stark.com, Joseph Lemkin at (609)791-7022 or via email at jlemkin@stark-stark.com, or Thomas Onder at (609) 219-7458 or via email a tonder@stark-stark.com.
